Calls Grow to Deny Italy's Central Bank Chief a Second Term

By Giovanni Legorano and Deborah Ball Features Dow Jones Newswires

Political pressure in Italy is rising with calls to deny a second mandate to central bank Governor Ignazio Visco when his term ends this month, amid mounting criticism of the bank's performance in managing the crisis that has afflicted the country's banks in recent years.

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The governor's six-year term expires at the end of this month and, until recently, his reappointment appeared likely. The Italian government submits the name of its preferred candidate for the position, but Italian President Sergio Mattarella makes the final decision and consults with the leadership of the central bank.

The Italian government hasn't yet said whether it will propose Mr. Visco. A government spokesman didn't respond to a request for comment.

In recent days, opposition among political parties to the reappointment of Mr. Visco--coming just months ahead of national elections in Italy--has risen.

The antiestablishment 5 Star Movement and other populist parties have long been critical of the Bank of Italy's leadership in managing a banking crisis that has cost taxpayers billions of euros and required the government to bail out a number of crippled lenders.

Those criticisms spread when the ruling center-left Democratic Party presented a parliamentary motion Tuesday blasting the bank's performance under Mr. Visco's leadership and calling for the nomination of "the most suitable figure to guarantee fresh trust" in the central bank.

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"In recent years, doubts have emerged as to the efficacy of the Bank of Italy's banking oversight, given the repeated and serious situations of crisis and instability in the banking system that could have been mitigated by more timely and incisive management," said the motion.

In a statement, the central bank blamed the lenders' woes on an economic downturn in Italy that was the worst since the war, adding that its action prevented even more damage to the banks and deposit holders. It also noted that the problems at some banks were due to fraud and criminal activity.

The firestorm over Mr. Visco's reappointment comes just as the central bank and the Italian government take issue with a proposed new plan by the European Central Bank to tackle the nearly EUR1 trillion ($1.177 trillion) of nonperforming loans sitting on the balance sheets of eurozone lenders. Italian lenders account for about a third of that total, a burden that explains part of the chronic underperformance of Italy's economy. Mr. Visco, who also sits on the ECB's governing board, has been a leading voice against Europe's bail-in rules.

Mr. Visco's term coincided with a deep banking crisis that exposed a host of problems, including lax lending practices, political interference, excessive costs and poor profitability. Banks' sour loans grew by 80% during Mr. Visco's tenure.

His term also straddled the period when the ECB took over supervision of the eurozone's largest banks--a handover that at times cast the Bank of Italy in poor light.

In a health check the ECB conducted of the banks just before the handover in autumn 2014, Italian banks emerged as the most troubled. Nine of the 25 eurozone banks that flunked the tests were Italian, with the stress tests finding they were nearly EUR10 billion short on capital.

Banca Monte dei Paschi di Siena SpA emerged as the worst performer by far. Its woes threatened in 2016 to spread to other Italian lenders; it was nationalized earlier this year.

Over the past year, Italian banks have raised billions in fresh capital and have begun to execute plans to shed tens of billions of bad loans. However, it could take a decade for banks to reduce their nonperforming loans to the European average, according to Morgan Stanley. The Bank of Italy has said it believes the bad loan problem is "serious but manageable."

The ECB has begun pressuring eurozone banks to tackle the problem, recently proposing rules that would force banks to set aside more money for the bad loans. The Italian government and the central bank have been highly critical of the proposal, saying it would force the banks into fire sales of bad loan portfolios, erode their capital cushion and squash lending.

Write to Giovanni Legorano at giovanni.legorano@wsj.com and Deborah Ball at deborah.ball@wsj.com

(END) Dow Jones Newswires

October 18, 2017 08:07 ET (12:07 GMT)